Debt consolidation FAQs

1. What is debt consolidation?
2. Why would I want to consolidate my debts?
3. How can a consolidation loan lower my monthly payments?
4. Do I have to be a homeowner to consolidate my debts?
5. Are there any drawbacks to a consolidation loan?
6. What's the difference between a debt consolidation loan and a debt consolidation mortgage?

1) What is debt consolidation?

It's a way of paying off all your existing debts by taking out a new loan or remortgage that's big enough to pay them all off in one go.

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2) Why would I want to consolidate my debts?

Consolidation can increase your disposable income by reducing your monthly repayments.

It can also make your life a lot simpler. The more debts you have, the harder it is to keep track of them – and making payments late (or missing them altogether) can affect your credit rating and lead to charges, higher interest rates, or even legal problems.

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3) How can debt consolidation lower my monthly payments?

In two ways.

First, you can arrange to pay back the debt over a longer period of time. Since you're paying it back more slowly, each monthly payment will be lower. However, since you'll owe money for longer, you'll be paying interest for longer, and that could mean you'll end up paying more in the long run.

Second, many unsecured debts (especially store cards and credit cards) come with high interest rates. If you can find a consolidation loan with a lower interest rate, this can also reduce your monthly payments, depending on how quickly you're paying off the consolidation loan.

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4) Do I have to be a homeowner to consolidate my debts?

No. You can take out an unsecured consolidation loan if you don't own any property, or if you don't wish to borrow against it.

However, as with all kinds of loans, an unsecured consolidation loan will often come with a higher interest rate than a secured loan. In other words, you'll be less likely to find a consolidation loan with a really good interest rate – but you can still reduce your monthly payments by arranging to pay back the debt over a longer period of time.

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5) Are there any drawbacks to debt consolidation?

Consolidation can end up costing you more in the long run.

It also allows you to run up new debts, as you're paying off your credit cards, store cards, overdrafts, personal loans, etc. If you're not sure you have the willpower (and the finances) to avoid doing this, you should think very carefully about consolidating your debts. Click here for more on the pros & cons of debt consolidation.

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6) What's the difference between a debt consolidation loan and a debt consolidation mortgage?

With a debt consolidation mortgage, you take out a new mortgage big enough to pay off your unsecured debts and your mortgage. If you do this, you'll only have one payment to make every month – your mortgage payment.

With a debt consolidation loan (secured or unsecured), you borrow enough to pay off your unsecured debts. If you do this, you'll start paying off this loan every month, but your original debts will be gone. Your mortgage / rent payments won't be affected at all.

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THINK CAREFULLY BEFORE SECURING OTHER DEBTS AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON A MORTGAGE OR ANY OTHER DEBT SECURED ON IT. Loans subject to status and where mortgages are involved, subject also to type and value of property. For mortgages, an admin fee of £395, or where any additional cash raise exceeds £20,000, 5% of the additional cash raise, is payable on completion (maximum fee £1495). For secured loans a 10% broker fee is payable on completion. [The actual rate available will depend upon your circumstances. Ask for a personalised illustration.] DEBT CONSOLIDATION MAY INCREASE THE AMOUNT TO BE REPAID IN THE LONG TERM. Calls may be recorded.